$100 Oil…Why aren’t they drilling!?

Global oil prices are through the roof and the global push to move away from fossil fuels seems to be reversing its course with the continued fallout of corona and the geopolitical turmoil caused by Russia’s invasion of Ukraine. Last time oil prices rose over $100 a barrel, it set off a real estate and investing boom across oil country that rippled out to give a boost to the Canadian and United States economy. Generally the overall economic benefits would outweigh consumers pain at the pumps. But this time it seems different. Any optimism about the future of the oil and gas sector is tempered by overwhelming uncertainty. The extreme market volatility seen this week underscores just that. In the past, oil and gas companies followed a reliably predictable boom and bust cycle. When oil prices were low, oil producers would cut back on production and OPEC would impose temporary production caps, but the moment that prices rebounded the industry would rush into a drill, baby, drill mentality, restarting the cycle. While this pattern held true for decades, the Covid-19 pandemic has changed things. The last time that oil prices hit $100 a barrel nearly a decade ago, oil industry areas saw a flurry of growth and investment to accommodate new hires, spiking demand for office space and stoking the real estate market. Not so this time around. Even with oil prices expected to climb higher, energy companies who were burned by two oil busts in five years, aren’t exactly eager to expand. In fact, they are not even motivated to simply increase production by exploring additional leases. Just like other corporations, oil companies rely on shareholders and were forced to figure out how to do more with less, fewer employees and fewer offices. Companies have incorporated remote and flexible working arrangements for many employees, and they have no intentions to head over heels expand back into a higher cost environment without any guarantees on oil price stability. A company like Exxon surely remembers investing over the last decade and then posting a net annual loss of $22.4 billion for 2020, the largest in its history. The oil giant survived but many smaller companies did not. There were more than 600 industry bankruptcies between 2015 and 2021.Oil companies have plenty of opportunity to drill but it's not about permitting, it's about the risk of deploying capital. The ironic part about politicians’ involvement here is that some Republicans sound like Socialists and some Democrats like hardcore Capitalists. I guess anything goes, as long as it is the opposite of the other side. In addition to the risk of a volatile oil price, the global community has gotten behind the green energy transition and deadlines for global climate pledges are fast approaching. Clean energies are rapidly improving and becoming more cost-effective as more and more investment pours into new technologies. Industries such as solar and wind outgrow subsidies as they tap into economies of scale. Oil, gas and coal definitely have their benefits which becomes very clear in moments of global uncertainty, as we are experiencing right now. The conflict in Europe and the disruption of global supply chains have caused an unprecedented energy crunch that has driven countries back to the most reliable and independent forms of energy available. For most, this has meant a return to fossil fuels. But this pattern is most likely not sustainable. While the industry is currently enjoying an unexpected windfall, it may very well be the last. The case of Houston real estate underlines this fact. The boost in oil prices no longer inspires optimism and a growth mentality. Instead, companies are adopting a wait and see approach, which seems to be the only safe option in an era of uncertainty. There is little doubt that the energy industry will be altered. That alteration is a big deal and will be controversial for quite a while. Politicians will blame each other, past presidents will blame current presidents, future hopefuls will blame past presidents and current presidents will blame oil companies. The reasons are complex and blaming one person or one party is short sided. The oil industry will of course continue to exist and be very important, just a little different.